Seventh Circuit: Tax Court's Analysis in Hyatt Loyalty Program Case Was Incomplete

(Parker Tax Publishing May 2026)

The Seventh Circuit vacated a decision in which the Tax Court held that contributions made by various hotels to a hotel's loyalty program should have been reported as income by the hotel because the hotel directly benefited from its use of those contributions and thus was not eligible to exclude such amounts from income under the trust fund doctrine. The Seventh Circuit concluded that the Tax Court should have also considered that the claim of right doctrine offered another, broader, basis to exclude the income. Hyatt Hotels Corporation & Subsidiaries v. Comm'r, 2026 PTC 91 (7th Cir. 2026).

Background

Hyatt Hotels Corporation & Subsidiaries (Hyatt) is an international hospitality company that owns, manages, and franchises hundreds of hotels. Some of these hotels are owned by Hyatt, but other Hyatt-branded hotels are owned by third parties in management or franchise agreements with Hyatt. From 2009 through 2011, the tax years at issue, Hyatt owned about 20 to 25 percent of the hotels that bore its name. During those years, Hyatt operated a loyalty program called the Gold Passport Program (Program). The Program allowed members to earn rewards points by spending money at Hyatt-branded hotels, which could later be redeemed for hotel stays and perks or travel miles. All Hyatt-branded hotels, including those owned by third parties, were required to participate in the Program.

To cover Program expenses, Hyatt managed the Gold Passport Fund (Fund), to which all Hyatt-branded hotels (those owned by Hyatt and otherwise) contributed. Hotel owners were required to pay 4 percent of qualifying purchases (i.e., purchases that earned Gold Passport points) into the Fund at the time the points were issued. Alternatively, if a Program member opted to earn travel miles instead of Gold Passport points, hotel owners paid into the Fund the actual cost of the miles.

For tax purposes, Hyatt essentially ignored the Fund. In March 2017, the IRS issued Hyatt a notice of deficiency in which it asserted that Hyatt should have reported all income flowing into the Fund as its income. Some of that money (i.e., payments into the Fund by Hyatt-owned hotels) was not at issue because it was already accounted for in Hyatt's income. But the IRS took the position that payments into the Fund from third-party hotel owners, direct point sales, and the Fund's investment holdings were all income to Hyatt for tax purposes. According to the IRS, Hyatt could then deduct the cost associated with redeemed rewards points in the year of redemption, which might be long after - if ever - the points were earned.

Hyatt petitioned the Tax Court and made several arguments. First, Hyatt argued that under the claim of right doctrine, the disputed payments in the Fund (i.e., payments from third-party-owned hotels, direct point sales, and the Fund's investments) did not constitute income to it since the funds were collectively owned by the hotel owners and could only be used for program purposes. In so arguing, Hyatt cited the Supreme Court's decision in Healy v. Comm'r, 345 U.S. 278 (1953) in which the court defined income as "earnings [received] under a claim of right and without restriction as to its disposition."

Second, citing the Fifth Circuit's decision in Affiliated Foods, Inc. v. Comm'r, 154 F.3d 527 (5th Cir. 1998), Hyatt argued that the exclusion was also appropriate under the trust fund doctrine, which excludes from income trust funds that the taxpayer must spend "for a specified purpose," receiving at most an "incidental and secondary" benefit in return.

Third, Hyatt argued that if the Fund was Hyatt's property and Fund income was its income, then it was entitled to use the trading stamp method of tax accounting authorized by Reg. Sec. 1.451-4(a)(1), which would offset that income by associated costs. Hyatt argued that the perks for which Gold Passport points could be redeemed - e.g., hotel stays and airline miles - were "other property" within the meaning of Reg. Sec. 1.451-4(a)(1), and thus it was eligible to use the trading stamp method.

Observation: Loyalty programs are the modern analog of the physical trading stamps that retailers once issued as promotions with sales of their products. If applicable, the trading stamp method would permit Hyatt to deduct the estimated cost (to it) of members redeeming their Gold Passport points when those points were initially issued.

In T.C. Memo. 2023-122, the Tax Court ruled against Hyatt on both issues. It relied on the Ninth Circuit's decision in Angelus Funeral Home v. Comm'r, 407 F.2d 210 (9th Cir. 1969) to support its notion that a more-than-incidental benefit is sufficient to decide that funds are income. It disregarded Hyatt's claim-of-right argument, finding that the doctrine didn't provide a basis for excluding income under the circumstances. It also held that Hyatt wasn't eligible to use the trading stamp method, reasoning that Reg. Sec. 1.451-4(a)(1)'s mention of "other property" was a catch-all term limited to tangible property. Since hotel stays and airline miles aren't tangible, the court concluded that Hyatt was not permitted to use the trading stamp method.

Hyatt appealed to the Seventh Circuit, arguing that (1) income to the Fund was excludible from Hyatt's income under the claim of right doctrine, and (2) that it was eligible to use the trading stamp method. Thus, the issue before the Seventh Circuit was whether the claim of right doctrine operates as an independent basis to exclude income and, if so, how that doctrine interacts with the trust fund doctrine.

Analysis

The Seventh Circuit sided with Hyatt and held that the Tax Court erred when it concluded that Fund income was Hyatt's income based solely on the trust fund doctrine without considering Hyatt's argument for exclusion based on the claim of right doctrine. As a result, the court remanded the case back to the Tax Court to consider whether Fund income constituted income to Hyatt under the claim of right doctrine.

The Seventh Circuit disagreed with the Tax Court's refusal to apply the claim of right doctrine because it didn't believe that doctrine provided a basis to exclude income in the circumstances presented. According to the Seventh Circuit, the pertinent question is whether the claim of right doctrine operates as an independent basis to exclude income and, if so, how that doctrine interacts with the trust fund doctrine. While the parties agreed that the claim of right doctrine operates as one of income inclusion, they disagreed about whether it also operates as one of income exclusion. Based on the Supreme Court's decision in Comm'r v. Indianapolis Power & Light Company, 493 U.S. 203 (1990) (Indianapolis Power), the Seventh Circuit concluded that it does.

In looking at the trust fund doctrine, the Seventh Circuit agreed with the Tax Court and held that if the funds satisfy the trust fund doctrine, they do not belong to the taxpayer because he is serving as a trustee for another. However, the court noted, the opposite isn't true and funds that aren't eligible for exclusion under the trust fund doctrine may still be excludable under the claim of right doctrine.

With respect to the Tax Court's reliance on the Angelus Funeral Home case to support its notion that a more-than-incidental benefit is sufficient to decide that funds are income, the Seventh Circuit found that reading disregarded the substance of the Ninth Circuit's reasoning in that case. The Ninth Circuit, the Seventh Circuit noted, found not just a benefit to the taxpayer, but also that the taxpayer's control over the funds - its "absolute power to benefit itself," using the funds "whenever it wished, subject only to limitations of purpose" - made it liable for taxation.

Finally, the Seventh Circuit said that, because it is remanding the case for the Tax Court to consider whether Fund income constituted income to Hyatt under the claim of right doctrine, it did not need to decide whether Hyatt was eligible to use the trading stamp method.

For a discussion of the claim of right doctrine, see Parker Tax ¶70,110. For a discussion of accounting for redemption of trading stamps and coupons, see Parker Tax ¶241,730.

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